With lockdowns and social distancing measures keeping people at home, tenants all across the US are having difficulty making their rent payments.
Their requests for rent relief are starting to affect equity investors, according to a new report from Bryan Reid, executive director of MSCI Research, and Niel Harmse, senior associate, Global Real Estate Research. Reid and Harmse analyzed fund- and asset-level data for 107 property funds in the UK, Europe, Australia and North America.
Not surprisingly, the pandemic hit retail and hotel rental incomes the hardest. From December to June, the NOI of retail assets declined by 21.4%, and hotel assets saw a 39.7% drop. NOI growth was flat in the office and residential sectors, while it grew 1.4% for the industrial sector, according to the MSCI Global Quarterly Property Fund Index.
Reid and Harmse also evaluated distribution yields among the funds they tracked to see if they reveal something that property income doesn’t. Globally, they saw a 20-basis-point widening in the spread between the asset NOI yield and fund distribution yield.
“As their cash flows were disrupted, many funds adjusted the shareholder distributions by slowing, suspending or deferring payouts,” Reid and Harmse wrote. “As a result, the spread between asset-level NOI yields and funds’ distribution yields has increased, suggesting that property-level rent collections may be lagging accruals.”
While investor debt as a percentage of gross asset value in MSCI’s core, open-ended real estate indexes moderated to the levels they were at before the financial crisis, rent reductions during the pandemic could potentially make it harder for some borrowers to service their loans.
Using data from the MSCI/PREA U.S. ACOE Quarterly Property Fund Index, Reid and Harmse calculate simple debt-service coverage ratios. They found that massive declines in revenue have had a pronounced impact on the ratios.
At the end of 2019, the ratio of NOI to borrowing costs stood at 5.0 for retail. Six months later, it fell to 3.3. “While retail assets in the U.S. ACOE index were still generating over three times more NOI than borrowing costs, the observed reduction in buffer may be replicated outside of core markets too,” Reid and Harmse wrote. “For assets with higher debt or that had lower buffer pre-pandemic, the falls in income could therefore cause more serious servicing risks.”